Overview

The slowdown in global economic growth, rising levels of unemployment and sinking real incomes will naturally have a curbing effect on demand for insurance and reinsurance covers. In such a situation, fewer cars are purchased and insured, industrial production requiring insurance declines, and consumers have less scope for making private provision. Nevertheless, a number of factors also act in the opposite direction and should lead to a stabilisation of insurance terms and conditions. After all, price losses on the capital markets have hit investments, thus reducing the entire insurance industry’s capital base. As a consequence, insurance and reinsurance capacities worldwide will tend to become scarcer. At the same time, the general need for security will grow, which – all other circumstances remaining equal – will have a stimulating impact on demand for insurance protection. This applies to some lines of primary insurance but in particular to the relations between reinsurers and their clients, the insurance companies. Primary insurers have lost capital and therefore risk-bearing capacity. As they are currently only able to borrow fresh capital, if at all, at very unfavourable terms and conditions, they need more reinsurance cover. This increased demand coincides with a reduced supply of reinsurance, resulting in an improvement in prices, terms and conditions. The high security of the Munich Re Group companies has become a distinct competitive advantage in this context, and our financial solidity provides us with market opportunities in a difficult economic environment.

In reinsurance, we anticipate a flight to quality in the wake of the financial crisis. The market should harden in the current year, opening up good opportunities for profitable business. We are well-positioned for this environment, owing to our consistent cycle management and solid capitalisation. We will provide our clients with high indemnity limits at risk-adequate prices, and we expect our financial strength to be rewarded with a growing amount of business at prices that differ from those of our competitors. These developments should enable us to at least partly offset the as yet unquantifiable recessionrelated losses in premium and to operate profitably.

In primary insurance, too, the crisis-related negative factors will be counterbalanced in the medium term by positive aspects, especially in life and health business. The general public’s need for care and provision is rising and has to be financed privately as the gaps in cover under state social security systems in the majority of European countries are becoming more and more apparent. Furthermore, we expect that life and annuity insurance, as traditional forms of old-age provision backed with solid guarantees, will recapture a larger share of our clients’ expenditure on private provision, particularly because trust in banking products generally offering only inadequate guarantees has suffered considerably from the financial crisis. This will give rise to major opportunities for our life, health and personal accident insurers in the medium to long term, provided state intervention does not distort competition. For property-casualty insurance, we project that - given normal economic parameters - premium income will rise, mainly owing to strong growth in our international business and selective expansion in German commercial and industrial business. However, here too there are strong reservations in view of the currently unassessable impact of the severe recession.

All the following prognoses are subject to considerable uncertainty, and reliable profit estimates for 2009 and 2010 are impossible under the present circumstances. With risk-free interest rates low and our equity exposure considerably reduced, we must expect a significantly lower investment result than previously envisaged. On the whole, however, we remain confident and are adhering to our long-term objective of achieving an attractive 15% return on risk-adjusted capital after tax for the coming years (a definition of RORAC is provided on here).

With a profit for the year of over €1.5bn (3.9bn) and a post-tax RORAC of 6.9% (20.2%), we fell short of our target for 2008. Although our basic business performed satisfactorily, our investment result dropped appreciably, impacted in particular by the massive declines in share prices on the stock markets and by the defaults and credit-rating problems among counterparties. In addition, our investment result in the previous year had profited from exceptionally high gains on disposals and we had benefited from an extraordinary tax effect of €0.4bn. In 2008, the crisis certainly did not leave us unscathed. However, thanks to our long-standing adherence to a strictly risk-conscious corporate strategy, it has not put us on the defensive like many other financial service providers but is offering us opportunities to extend our market position.

Now we are benefiting from the raft of initiatives launched in the past two years and in some cases already concluded. These initiatives were geared above all to improving our competitive position and to optimising our capital management. They have enabled the Munich Re Group to further sharpen its business profile and become an even more attractive partner for its clients. For our shareholders, Munich Re shares have proved a relatively good investment that has delivered a stable performance in the capital market crisis. We are financially and strategically well-positioned and able to effectively exploit our competitive strength to systematically tap opportunities without having to run unreasonable risks.

For the financial year 2008, the Board of Management and the Supervisory Board propose to pay our shareholders a dividend of €5.50 per share in 2009, i.e. the same level as last year. This is equivalent to a total of approximately €1.1bn for the shares currently issued. We are essentially still committed to our share buy-back programme but, as hitherto, will carefully review the advantages and disadvantages before implementing it further.